David Cameron is facing a growing backbench rebellion over size of Britain's
contribution to the European Union, aided by Labour MPs, ahead of a
"challenging" summit with European leaders.

The Prime Minister is hoping to stop the budget rising by more than inflation, currently at two per cent, but is facing calls from his own party - and potentially Labour as well - to cut the money paid to Europe.

The European Commission and many member states are pushing for a five per cent rise, while at least 28 Tory MPs and Labour all want the budget to be slashed.

Mr Cameron is facing a potential rebellion in the House of Commons tomorrow, as Labour is considering voting with the band of Conservative eurosceptics to force Britain to argue for a reduction.

William Hague, the Foreign Secretary, today laid into Labour for cynically supporting a budget cut to put the Prime Minister in a difficult position.

"It's notable that last year Labour MEPs voted against a budget freeze in Europe because they wanted an increase instead," he told the House of Commons.

"It's also notable that in the time that the shadow chancellor was a Treasury adviser and in the Cabinet, the annual EU budget increased by no less than 47 per cent."

Britain has little support for any drastic cuts among fellow EU members as they battle over the seven year budget.

Cyprus, which has the presidency of the EU, today said it wants a middle ground and called for £40 billion to be shaved off the European Commission's proposals - half the amount proposed by Britain. The Dutch, German and Swedish also reportedly want to water down the EC's demands.

However, many of the poorer eastern European nations will benefit from the European Commission's proposal for a five per cent rise, which would increase Britain's contribution by around £10 billion over the next seven years.

Mr Cameron's spokesman said the Government is being "realistic" about the difficult prospect of securing a deal.

He said the Prime Minister faces a tough fight to curb the budget at the "challenging" summit.

"It is not going to be straightforward to reach an agreement," he said. "It is something that has to be agreed by all 27 countries around the table.

"The majority of countries around the table are getting more out of the EU budget than they are putting in. That will obviously affect their view.

"We want to try to reach a deal but it needs to be a deal that we find acceptable and is in our our country's interests."

The Prime Minister has already threatned to veto the budget, rather than allow a "substantial" increase. However, failure to reach a deal covering the next seven years simply means the budget will be voted through on an annual basis. This can be passed by a majority, stripping Britain of its veto.

Earlier, a think-tank suggested Britain should offer to give up its valuable EU rebate in return for a radical shrinking of the bloc's budget.

The IPPR claimed such a "grand bargain" could be sold to the British public if the budget cuts were deep enough to ensure that the UK's contribution still dropped overall.